There was a post on IEB in December 2006, on whether there was a bubble in Indian real estate (Link), courtesy IEB reader Annamalai Veerapan.
16 months later, Annamalai is back with a follow up post on the real estate bubble. It is reproduced below in full –
Who owns real estate loans in India?
I’ve been waiting for some official confirmation of the bursting of the real estate bubble in India. Although bursting of the bubble (or even the existence of it) is still just hearsay, it is widely accepted that Indian real estate market is stuttering (to put it the best way I can). This article in the New York Times puts the depreciation in New Delhi and surrounding areas at 20%. I thought this is a good time to do a followup on my first post on Indian real estate.
In the midst of the bursting housing bubble in US, UK, Spain, Ireland ..etc., sub-prime has become a common word (it also was nominated as the word of the year). There are several articles, blog entries and web sites detailing the life cycle of a mortgage loan in these countries, especially in the US, talking about how these loans are converted to Mortgage Backed Securities (MBS) and packaged as Credit Default Obligations (CDO) and sold to hedge funds, central banks, private investors and investment banks. Although it is not exactly known who owns how much of the toxic mortgage loans, at least we know what happens to these loans in a general sense. This is very important in the current scenario for any kind of safe investment in the stock market or even to have a decent understanding of the current complex derivative based economic environment.
I’ve been trying to find out what happens to a mortgage loan made in India. Does the bank own it? Or do they sell it as MBS? If they sell it as MBS who buys it? What are the risks for ICICI, HSBC and the other large mortgage lenders in India, if there is a 20% to 50% crash in real estate prices in India? Does India also have a fractional reserve banking system? With the foreclosure process in India not that well defined who will end up holding the bag?
All these questions arise if we assume a deflating housing bubble. I know many readers still feel that there is no housing bubble in India. Let us keep that aside for the time being and let us assume hypothetically that there is a bubble in India and it will deflate 20-50% and and try to answer the following
- What does ICICI/HSBC do with a mortgage loan they issued?
- Are there any organizations equivalent to Countrywide/ New Century whose main role is issuing mortgage loans?
- Are mortgage loans in India securitized and sold?
- If yes, to the above question, who are the buyers of these securities?
- What is the foreclosure process in India? How simple and efficient is it?
- What happens when someone defaults on a home loan in India?
I’ve done some (re)search and I will sum it up in the next email/ post.